18 Share Tips – 3 December 2012

Carey Smith, Alto Capital

BUY RECOMMENDATIONS

Harvey Norman Holdings (HVN)

Chart: Share price over the year to versus ASX200 (XJO)

HVN, like most retailors is struggling, with sales and profits likely to remain weak this year. But the current market value of HVN is less than the value of its extensive property portfolio alone. If the Harvey Norman brand name and $644 million in excess franking credits are taken into account, it appears that HVN is currently worth more dead than alive. You would make more money liquidating the company.

Doray Minerals (DRM)

Chart: Share price over the year to versus ASX200 (XJO)

DRM recently commenced pre-stripping the open pit at its high grade Andy Well gold project. The group is fully funded through to first gold production scheduled for mid next year. With annual production of 70,000 ounces at a forecast cash cost of A$600 an ounce, DRM is expected to be one of the lowest cost gold producers on the ASX.

HOLD RECOMMENDATIONS

QBE Insurance (QBE)

Chart: Share price over the year to versus ASX200 (XJO)

Until recently, QBE was considered one of the best managed and profitable insurance groups in the industry. But recent losses due to the super storm Sandy in the US have knocked investors’ confidence, resulting in a multi-year share price low. Over time, we expect the share price to recover for patient investors.

Toll Holdings (TOL)

Chart: Share price over the year to versus ASX200 (XJO)

TOL is the largest integrated logistics provider in the Asian region, making it very dependent on the health of the global economy. Early signs of a recovering US economy and continuing strength in Asian economies should provide investors with more confidence in the group’s operations going forward.

SELL RECOMMENDATIONS

Flight Centre (FLT)

Chart: Share price over the year to versus ASX200 (XJO)

Managing director Graham Turner recently announced he had sold millions of dollars of FLT stock. Considering the share price has risen about 50 per cent in the past six months and the MD was a seller leads us to conclude the shares are overvalued. The share price has risen from $3.40 in 2008 to trade at  $27.11 on November 28.

Regis Resources (RRL)

Chart: Share price over the year to versus ASX200 (XJO)

RRL has been the standout performer in the gold sector in the past three years, with a share price gain of more than 600 per cent. But with a market capitalisation now above $2.5 billion, we feel its valuation is stretched compared to other producers, and better value can be found elsewhere.

Sean Conlan, Macquarie Private Wealth

BUY RECOMMENDATIONS

Monadelphous (MND)

Chart: Share price over the year to versus ASX200 (XJO)

A leading engineering group, MND’s strong earnings growth profile, impressive track record of successful project delivery, solid balance sheet and 6.3 per cent fully-franked dividend yield make it a standout in the contractors’ space. Its price/earnings premium compared to its peers is justified.

Incitec Pivot (IPL)

Chart: Share price over the year to versus ASX200 (XJO)

IPL’s strong cash flow generation and attractive balance sheet present options going forward. The higher dividend is a positive signal and indicates a more shareholder friendly approach. The Moranbah ammonium nitrate plant should drive further earnings growth in full year 2014 for this fertilisers and explosives company.

HOLD RECOMMENDATIONS

Programmed Maintenance Services (PRG)

Chart: Share price over the year to versus ASX200 (XJO)

PRG had flagged to the market that property and infrastructure margins were under pressure. But the result was worse than we anticipated. Trading on a full year 2013 price/earnings ratio of 7 times, the stock isn’t demanding. But we remain concerned about delivery of second half 2013 earnings considering the very challenging past six months.

Navitas (NVT)

Chart: Share price over the year to versus ASX200 (XJO)

We expect longer term growth to resume in the international student market and believe NVT is well placed to capitalise on this opportunity given greenfield operations in key offshore markets. However, we continue to believe the stock is fairly priced trading on full year 2013 price/earnings ratio of 20.5 times.

SELL RECOMMENDATIONS

Boart Longyear (BLY)

Chart: Share price over the year to versus ASX200 (XJO)

A second significant downgrade within three months is disappointing and represents another hit to management credibility. Despite cuts to earnings, there’s no certainty this drilling company has reached a bottom, particularly as price declines are yet to flow through, and it remains to be seen whether cost-cutting measures will be sufficient to offset them.

Sims Metal Management (SGM)

Chart: Share price over the year to versus ASX200 (XJO)

The recent trading update highlights the difficult market conditions SGM is currently facing. Its significant cost reduction initiatives have been insufficient to offset the negative impacts of tight scrap flows and low metal spreads.

Darren Jackson, Calibre Investments

BUY RECOMMENDATIONS

Billabong International (BBG)

Chart: Share price over the year to versus ASX200 (XJO)

We reiterate our speculative buy recommendation published here in early November. Since then, the president of BBG’s Americas division Paul Naude has stepped aside while he considers a buyout of the company. This reaffirms our belief the company is materially undervalued. Meanwhile, BBG is considering floating its e-commerce business with a reported potential valuation of up to $300 million.

National Australia Bank (NAB)

Chart: Share price over the year to versus ASX200 (XJO)

NAB is currently the big bank sector laggard, underperforming it peers post the GFC. The poor performance of its UK operations and extra provisioning had caused a massive sell off in the stock. NAB now represents a buying opportunity for those who believe a turnaround can be achieved, or for investors seeking a high yield income (trailing dividend yield of 7.55 per cent fully franked).  

HOLD RECOMMENDATIONS

Aquarius Platinum (AQP)

Chart: Share price over the year to versus ASX200 (XJO)

Ongoing labor strikes in South Africa (the largest producer of platinum) have crippled the earnings of platinum producers and caused the physical platinum price to soar. Once these strikes subside, miners, including AQP, will recover and they should be able to take advantage of the relatively high platinum price.

Whitehaven Coal (WHC)

Chart: Share price over the year to versus ASX200 (XJO)

Following the fall in Whitehaven’s share price, we upgrade our recommendation from a sell to a hold. Natural gas prices in the US are now at one-year highs, while thermal coal prices remain depressed. If this trend continues for a significant time, expect a shift from natural gas to thermal coal to generate power. WHC’s earnings and valuation would benefit.

SELL RECOMMENDATIONS

GrainCorp (GNC)

Chart: Share price over the year to versus ASX200 (XJO)

We recommended buying GNC in early October. We now recommend investors take a 40 per cent profit after a takeover proposal was made by US-based Archer Daniels Midland. Probably a higher bid will emerge, but with GNC recently trading at a 5 per cent premium to the conditional proposal, we don’t believe the risk/reward justifies holding the stock.

BlueScope Steel (BSL)

Chart: Share price over the year to versus ASX200 (XJO)

BlueScope Steel has more than doubled in valuation from its July 2012 low. Despite a restructure and capable management team, the macro conditions still remain unfavourable. These include a high Australian dollar, weak domestic demand and low steel prices. Sell into the recent share price strength.

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